Reducing accounting volatility and risk

ABSTRACT

Memory storing terms of a contract for reducing accounting volatility and risk, the terms including specification of at least one measure of variation in a rate of return corresponding to a return on an investment portfolio, a variable speed of adjustment factor and a contract rate of return on an investment associated with the investment portfolio, wherein the amount of the measure of the variation changes over time; a computer computing an amount for the at least one measure of variation, calculating an amount for the adjustment speed factor and using the amounts in: determining at least one of a contract rate of return on the investment associated with the investment portfolio and a contract value for the investment associated with the investment portfolio to produce output.

I. PRIORITY STATEMENT

This patent application is a continuation-in-part of Ser. No. 12/854,151filed Aug. 10, 2010, issuing as U.S. Pat. No. 8,095,448, on Jan. 10,2012, and Ser. No. 12/850,596 filed Aug. 4, 2010, currently pending.Ser. No. 12/854,151 is a continuation-in-part of Ser. No. 10/375,770filed Feb. 27, 2003, and issued as U.S. Pat. No. 7,774,256, on Aug. 10,2010. Ser. No. 10/375,770 claims benefit of Ser. No. 60/361,450 filed onFeb. 28, 2002, now expired. Ser. No. 12/850,596 claims benefit of Ser.No. 61/231,164 filed Aug. 4, 2009, now expired. All of the above areincorporated by reference completely as if restated totally herein.

U.S. patent application Ser. No. 12/854,151 “Reducing AccountingVolatility”, issuing as U.S. Pat. No. 8,095,4348 and U.S. patentapplication Ser. No. 12/850,596 “Apparatus, Article and Method forContract Values” are incorporated by reference completely as if restatedtotally herein. A “stable value rate of return” as referenced in U.S.patent application Ser. No. 12/850,596 is an example of a “contract rateof return” as referenced in U.S. patent application Ser. No. 12/854,151.

II. BACKGROUND INFORMATION

A. Technical Field

The technical field is process, machine, manufacture, pertaining tocomputer operations, and data processing, and communication.

B. Background

Today, there is a highly developed market where banks purchase lifeinsurance to pre-fund future employee benefit expenses. These banks makeuse of variable life insurance contracts with separate accounts thathold debt instruments. Generally, banks are prohibited from owningsecurities classified as equities. Also, it is widely believed that thisprohibition applies to assets held by a variable life contract, which isowned by a bank. Of course, as market interest rates fluctuate, theunderlying market value of the separate account debt instruments goes upand down. Under GAAP (see FASB Technical Bulletin (TB) 85-4), the policyis accounted for on a mark-to-market basis. Seeking to avoid earningsvolatility from their life insurance purchases, banks have bought StableValue Wraps (SVWs) inside their separate accounts. For all intents andpurposes, the SVWs promise that the debt security will earn a set rateof return—which will be reflected in the principal of the debtinstrument. Upon surrender of the policy, the owner will receive theamount of principal reflected in the SVW contract—nothing more or less.As a result, earnings are stable and predicable even if market interestrates fluctuate widely and the underlying policy cash surrender valuegoes up and down.

The parties writing the SVWs are typically not the carrier issuing thelife contract or the party managing the investment. The “writers” can beeither banks or insurance companies that are familiar with sophisticatedderivative transactions.

During the past year, other industries have become interested in usingvariable life insurance to pre-fund employee benefits. Typically, inother businesses, there is no regulatory prohibition to owning equitiesinside of a variable life policy. Notwithstanding, prospective policybuyers are anxious to avoid the exposure to mark-to-market accounting inyears when the investments are under-performing expectations. Writers ofSVW contracts have been reluctant to offer contracts when the separateaccount securities are equities instead of debt. The proposed fees forequity SVWs have been so high as to be unattractive to the market.Accordingly, it has become useful to invent a new approach to dampen theearnings volatility from owning equities for benefit funding purposes.There is a need for a new approach that will apply most often toequities and equity-like instruments held inside a separate account of alife policy. Still, there is a need for a new approach that is equallyapplicable where assets are held directly by a company and accounted forusing mark-to-market (e.g., tracking securities under SFAS No. 115).

III. BRIEF DESCRIPTION OF DRAWINGS

FIG. 1 is a summary flow chart of embodiments herein.

FIG. 2 is a graph of a “normal” curve.

FIG. 3 is a block illustration of embodiments herein.

FIG. 4 is a flow chart illustrating embodiments herein.

FIG. 5 is a flow chart illustrating embodiments herein.

FIG. 6 is a flow chart illustrating embodiments herein.

FIG. 7 is a flow chart illustrating embodiments herein.

IV. SUMMARY

Depending on the implementation, there is apparatus, a method for useand method for making, and corresponding products produced thereby, aswell as data structures, computer-readable media tangibly embodyingprogram instructions, manufactures, and necessary intermediates of theforegoing, each pertaining to digital aspects of reducing accountingvolatility and risk.

V. MODES

We have devised a system to provide a significant reduction of incomeaccounting volatility due to a corporate holding of equities and/or debtsecurities with respect to a benefit funding program. Further, the costto the policy owner is at an affordable price. The system can be carriedout with a computer apparatus, method, and/or article of manufacture,(see, generally, e.g., FIG. 1). Appreciation of the computer apparatus,method, and/or article of manufacture can be furthered by a briefexplanation of the system. However, it is noted that the principles ofthe system are applicable to more situations than the fact patterndescribed herein.

The system makes possible the use of equity and equity-like instrumentsfor funding where investors have a low tolerance for substandard ornegative earnings in a reporting period. Typically, these same investorsare required to account for their assets on a mark-to-market basis.Alternative equity and equity-like investments might include balancedbond and equity funds, fund of hedge funds, Russell 3000 index funds,etc.

Unlike the SVW for bank-owned life insurance, the system herein is notdirected toward, and indeed can be carried out devoid of, a guarantee ofa given rate of return on the subject investment. Instead, the systemuses the historical financial performance information of the fund tocompute the statistical mean and annual standard deviation. For thereporting period (e.g., monthly, quarterly, annual), the system comparesthe actual earnings realized with the historical mean and standarddeviation. Under the normal agreement, if actual earnings are betweenone and two standard deviations below the expected mean, then theagreement obligates the writer of the contract to make up the differencein investment value between one standard deviation below the mean andthe actual return. Note that the writer of the contract is not requiredto make any payment to the policy separate account at the end of eachaccounting computation and reporting period. Instead, the contractwriter is obligated to make a payment in the event that the fund is soldor otherwise liquidated. Accordingly, by way of an example for variablelife insurance contracts accounted for under TB 85-4, the policy ownerrecords the obligation the same as cash value and, as a result, it ispart of the GAAP earnings of the policy owner.

This system may be best understood with a simple example. Assume $1,000of cash value in a life insurance contract separate account holding afund of hedge funds. The mean return for the fund is 13% and thestandard deviation is 6%. Accordingly, the second standard deviationbelow the mean return ranges from 7% to 1%. Accordingly, in our example,the program says that the policy owner will be able to report a 7%return even if actual income was only 1%, i.e., the lower limit of thesecond standard deviation. In other words, the contract guarantee in ourexample is $1,070 of cash value at the end of the year. If actualreturns are 1%, then actual assets are $1,010. The writer of thecontract will have an obligation of $60 in the event the policy ownersurrenders the policy. Because of this obligation, the policy owner cancarry a policy cash value of $1,070 on its GAAP balance sheet under TB85-4.

Under the system, normally there is a cap or maximum exposure that theprogram writer has to assume. Once the actual returns fall below twostandard deviations of the mean return (e.g., below 1%), the systemcoverage cannot take the rate of return back to one standard deviationbelow the mean (e.g., 7%). Instead, a fixed percentage rate of returnwill be added to the actual rate of return. Again, assuming that theactual return is −5% and the fixed percentage adjustment is equal to onestandard deviation or 6%, then the book return is 1%. The policy cashvalue for GAAP is $1,010. This amount equals the actual investment valueof $950 plus the writer's obligation of $60.

FIG. 2 is a graph of the “normal” curve of the example discussed above.Note the protection areas with bar shading where returns are less thanone standard deviation below the mean.

System Enhancements. Under a system plan, there are a variety of methodsto modify the program to adjust the fee to the owner of the investment.Of course, each cost reduction technique requires that the policy ownerassume a greater proportion of the risk of sub par performance and thewriter of the contract assumes a lesser proportion of the risk.

Based on the above example, the expectation is that over time theinternal rate of return of the investment will be close to 13%. If theactual returns are more than one standard deviation below the mean(i.e., below 7%), then the writer incurs an obligation to the investmentaccount. Of course, if the internal rate of return of the investment is7% or greater over a series of years, there still can be years whenreturns are less than 7%. The year a substandard performance occurs(e.g., a 1% return), an obligation under the contract can arise in thatyear.

A highly remote but potentially large dollar risk to the contract writeris that the covered investment will consistently under-perform the onestandard deviation threshold. For example, this would be the case wherein the first ten years the investment returns were, say, 4% per annum.In this scenario, each year the system adds 3% of last year's investmentactual value and 7% of the corresponding obligation to the accumulatedobligation. Because the returns never exceed one standard deviation(e.g., 7%), the obligation will continue to increase in thishypothetical situation.

Accordingly, the writer of a contract will typically want to limit themagnitude of its obligation under the contract. That limit can be adesignated fixed amount. Still, most users will prefer a formula drivenlimitation. A simple formula limit could be last year's actualinvestment value times a percentage amount (e.g., 15%). Alternatively,the limit could be a percentage of last year's guarantee amount. Today,the latter is the preferred approach. Of course, it is possible to writea contract such that the guarantee percentage limit varies from year toyear. For example, in year one the percentage might start at 5% andincrease 1% per year until the amount reaches, say, 15%. The system caninclude this risk limitation feature.

There is another method of limiting risk transfer from the contractwriter to the owner of the investment fund. The contract can phase inthe maximum amount of percentage points to be added to the actualreturn. For example, in the first year that maximum could be 3%. Tocontinue our example, if actual returns are 2%, the guarantee return is5%. If actual returns equal 6%, our guarantee return will still belimited to 7%, or one standard deviation below the mean in thehypothetical example.

More particularly, consider now the process, machine, and manufactureaspects pertaining to computer apparatus, data processing, andcommunications aspects of implementing embodiments herein. Embodimentsare described hereinafter with reference to the corresponding figures.However, there are many different variations of these embodiments, andthis description should not be construed as limited to the embodimentsused to provide the overall teaching herefrom. Similarly, theaccompanying figures illustrate embodiments intended to illustrate andexemplify in a teaching manner, by way of the prophetic teachingsherein. Like numbers, in the text and figures, refer to like elementsthroughout.

As used herein, the term “computer” generally refers to hardware orhardware in combination with one or more program(s), such as can beimplemented in software. Computers can be implemented as general-purposecomputers, specialized devices, or a combination of general-purpose andspecialized computing devices. Computing devices can be implementedelectrically, optically, quantumly, biologically, and/or mechanically orin any combination of these technologies. A computer as used herein canbe viewed as at least one computer having all functionality or asmultiple computers with functionality separated to collectivelycooperate to bring about the functionality. This includes singleprocessor and multi-processor implementations of a computer. A processorcan include any device that processes information or executesinstructions. Computer logic flow and operations can be used inprocessing devices, including but not limited to: signal processors,data processors, microprocessors, and communication processors. Logicflow can be implemented in discrete circuits, combinational logic,ASICs, FPGAs, reconfigurable logic, programmed computers, or anequivalent.

Computer-readable media or medium, as used herein, includes anytechnology that includes a characteristic of memory. Memory technologiescan be implemented using magnetic, optical, mechanical, or biologicalcharacteristics of materials. Common examples of memory include, but arenot limited to, RAM, ROM, PROM, EPROM, FPGA, flash drive(s), and floppyor hard disk(s). Communications medium or connection, as used herein, isany pathway or conduit in which information can be communicated orexchanged. The pathway or conduit can be wired, optical, fluidic,acoustic, wireless, or any combination of the foregoing.

The computer apparatus can include one or more computers, whichillustratively can be PC systems or server systems, and any combinationof the foregoing. Depending on the implementation, computers can beadapted to communicate among themselves, or over a network such as theInternet. Programs, as used herein, are instructions that when executedby a processing device causes the processor to perform specifiedoperations. Programs can be written in various languages, including butnot limited to assembly, COBOL, FORTRAN, BASIC, C, C++, or Java.Languages can be object oriented like C++ and Java, for example. Theprogramming language can be interpretive or compiled, or a combinationof both. The programs are usually processed by an apparatus having anoperating system. An operating system can be processor specific, like anRTOS (real time operating system) used in cell phones, or commerciallike OSX, UNIX, Windows, or LINUX. An operating system or program can behardwired, firmware, reside in memory or be implemented in an FPGA orreconfigurable logic.

For example, a computer apparatus can comprise a computer (e.g., anIBM™, Hewlett Packard™, MAC™, or other personal computer) with one ormore processors (e.g., an Intel™ or AMD™ series processor or the like),a memory (e.g., RAM, a hard drive, disk drive, etc.), one or more inputdevices (e.g., keyboard, mouse, modem, or the like), and one or moreoutput devices (e.g., a modem, a Hewlett Packard™ printer, a Dell™monitor, or other such output device). Note that the modem isrepresentative of a computer-to-computer communication device that canoperate as an input/output device. To provide other illustrativeembodiments, the computer apparatus can comprise at least one of adesktop computer, a telephonic device, a console, a laptop computer, anda mobile communication device. The mobile communication device cancomprise at least one of a cellular telephone, laptop, a PDA, and anIPhone-type device. Communications between devices may be wired, forexample cabled Ethernet based home or office network, wireless throughIEEE 802.11a/b/g network cards or Bluetooth™, or optical through an IRport. Networking between devices may be through WANs, LANs, Intranets,Internet or peer-to-peer arrangements, or in a combination of them.Networks may include, for example, gateways, routers, bridges, switches,front end and back end servers, IPS (Internet service providers),content provider servers, scanners, copiers, printers and user computingdevices. Devices on the network may include interfaces that can be assimple, such as a keyboard with an LCD screen, or can be complex, suchas a web interface. Web interfaces are presented in a web browserenvironment. Web browsers render XML or HTML containing pictures andlinks in a window on the desktop, for example like Windows XP™.Firefox™, Mozilla™, Internet Explorer™, and Safari™ are some examples ofwell known web browsers.

Consider now the figures which illustrate so as to teach the broaderprinciples at play.

Referring to FIG. 1, entities and processing (either or both spread outor consolidated in one way or another as may be preferred in any givenapplication, recognizing one configuration or another may localizecontrol and benefit) are illustrated. These can cooperate in a digitalmanner to carry out terms of an agreement. Please keep in mind that theparticulars can be implemented in a variety of different configurations,so as to carry out the embodiment of interest.

As a teaching example, consider an embodiment which portrays andadministers a method to enable a corporation to minimize any materialnegative effect on earnings from a volatile investment in equity andequity-like instruments. Investments suitable for such an embodimentwill have historical rates of return from which it is possible tocompute a mean (or other type of average) return and a standarddeviation from the mean (or similar statistical measure of volatility).Often, these investments will be held in variable life insurance policyseparate accounts. An implementation allows the investment returns thatfall below a specific measure away from the expected mean to be recordedat that specific measure of return. The income reporting protection istruncated. Once actual returns fall below a second and lower rate ofreturn level, the income reporting protection itself becomes limited toa fixed upward adjustment. Via this approach, the income reportingprotection is significant in as much as it covers the instances where asubstandard rate of return is most likely to occur. Once returns fallinto the realm of unlikely and unattractive, some accounting protectionwill be available. Said differently, when a low probability negativeevent occurs (e.g., an investment loss), the protection is limited andso too is the writer's exposure under the corresponding contract.Depending on how low actual returns fall, the adjusted book accountingreturns could be much less than the target minimum rate of return.

Another embodiment is directed to a computer apparatus implementing suchprocesses as: 1) computing the actual rate of return and otherperformance statistics of the investment; 2) determining the investmentbook value to be recorded under the corresponding contract; 3)calculating the amount of the corresponding obligation that exists atthe end of each reporting period; and 4) reporting and tracking thevalues set forth above.

The apparatus, method, and/or article of manufacture can use two typesof information: 1) information related to the investment and 2)information describing the terms of the plan. Investment informationitself falls into two categories. First, there is the historicalinformation about the investment fund's performance prior to theimplementation of the system, which can be handled by apparatus. Thisinformation is used to compute the rate of return statistical standardscreated in the system program. These values (e.g., mean and standarddeviation) are included in the formula computing the periodicobligations, if any. Second, the apparatus can create investmentperformance information using post plan implementation investmentperformance data. Such data will include rate-of-return values (e.g.,mean and standard deviations) when computing that period's obligation,if any.

Information regarding terms of a system plan can be used in a formulathat reflects the logic of the contractual arrangement. Further,additional information might include the percentage that is applied tocomputed assets to establish an overall limitation as to the amount ofloss protection permitted by the plan. Also, additional informationmight include a formula to gradually increase the amount of protectionin the first few years until it reaches a maximum established by thecontract.

Once the information is available to the apparatus, the data can beaccessed to complete the processing to carry out an embodiment.

Computing Actual Performance Statistics. One embodiment communicateswith a fund manager's computer apparatus to obtain the values thataffect the rates of return of an investment: the beginning periodamount, additional contributions during the period, distributions duringthe period, and the end of the period amount. With these fund flows andvalues, the system can compute a rate of return for the period. Also,using the historical data on the fund in the data, it is possible tocompute a rate of return for the fund that includes the historicalperiod. Also, the apparatus can generate standard deviation or othervolatility statistics that are updated through the most currentreporting period.

Determining Obligation & Limits. For each reporting period, theapparatus can use data stored in a memory operably associated with theapparatus, and information computed for the reporting period, todetermine what, if any, obligation is created by the writer of thecontract to the owner of the (for example) investment fund. Thatobligation is accounted for under GAAP as additional investment value onthe books of the fund owner.

When subject to a contract, an investment does not trigger an obligationamount unless the actual return falls below a minimum level (e.g., onestandard deviation below the mean). Accordingly, the starting point forthis computation can be the actual rate of return and the investmentasset values determined above. If the actual return falls in a corridor(e.g., between one and two standard deviations below the mean), thesystem will designate a contractual minimum return (e.g., one standarddeviation below the mean) as the rate of return for the period. Still,if the returns are less than a pre-designated amount (e.g., two standarddeviations below the mean) the actual rate of return is increased by aformula amount. Using this rate of return multiplied by last year's GAAPbook value, the system computes a target asset value. If the targetasset value is less than the actual asset value, then the actual assetvalue is the value to be used by the owner of the investment fund. Thereis no obligation incurred by the writer of the contract under thisscenario.

Where the target asset value exceeds the actual value of the investment,the corresponding contract triggers an obligation of the writer of thecorresponding contract. Under one system design, the obligation amountcan simply be the difference between the target and actual values ascomputed by the apparatus. Still, most writers of an correspondingcontract will elect to place a limit on their potential obligation to aninvestor. This limit will be computed by the apparatus (e.g., 10% oflast period's guarantee value plus the end of the period actual assetvalue) and compared to the target asset value to determine the lesser ofthe two. The apparatus labels the lesser amount as the book value forthe period.

The Obligation. The writer of the corresponding contract will want tohave an accurate determination of the corresponding obligation for eachreporting period. The apparatus computes the corresponding obligation tobe the greater of zero and the book value of the investment less theactual value of the investment. The values for the obligationcomputation are derived above.

Reporting and Storing. The apparatus has a capacity to produce thevalues derived above via an electronic computer-to-computercommunications mechanism, such as, for example, a modem, to the owner ofthe investment fund and to the writer of the corresponding contract. Ofcourse, the apparatus users can determine the extent of the data toprovide and if any third parties are to receive distributions. Further,the apparatus can store the computed data for inclusion in futurereports and computations.

One embodiment enables a writer of an accounting “hedge” contract for aninvestment fund (with some type of equities) to limit the writer'sdownside risk and, at the same time, provide the owner of the investmentwith a reasonable minimum rate of return to be reported under thecontract. Such accounting “hedge” contracts written for equitiesfollowed the format created in the market for debtinstruments—guaranteeing some target rate of return. These earlyattempts proved very expensive and exposed the writer to a high degreeof risk in a volatile equity market.

The apparatus creates a corridor of risk for the contract writer thatcan be easily quantified. The apparatus enables the writer to analyzethe risk and perform sensitivity testing prior to executing a contractas well as compute and track the contract obligation once a plan is inplace. Where the contract provides for a maximum obligation formula, thewriter is also able to know its maximum exposure under the contract. Asa result, the apparatus enables the contract writer to have betterinformation to price the cost of the contract coverage.

From the point of view of the owner of the investment, there is nolimitation on the upside of income that it can report from theinvestment. When the investment is under performing, there is a minimumreturn that it will be able to report in each period. Of course, ifactual income falls below some pre-set floor, then the book return canbe less than the target contract minimum. From a statistical point ofview, the probabilities are high that the investment owner will alwaysbe able to report the contract target minimum return or higher.

Referring to FIG. 1, an embodiment illustrates one approach fordelivering a reduction in accounting volatility. The illustratedapproach can include a provider of the reduction in accountingvolatility computing apparatus 2, a purchaser of the reduction inaccounting volatility computing apparatus 4, other computing apparatuses6, an exchange or trading network computing apparatus 8, a reportingcompany computing apparatus 10, an investment manager computingapparatus 12, an administrative computing apparatus 14, and an insurancecompany computing apparatus 16 all interconnected by one or morenetworks. Any combination thereof can also be implemented. The computingapparatus comprise computer readable memory and operably associatedprocessor 18, and FIG. 3 shows an expanded illustration of such acomputing apparatus, e.g., a digital electrical computer; a memorystoring executable instructions which when executed, causes the digital(electrical) computer to perform the operations corresponding to anembodiment herein.

The computing apparatuses interact with a reporting & tracking process20 which leads to a determining of the amount of the at least onemeasure of variation 22 and then a determining of a contract (book)value to report for the period 24, with FIG. 3 showing an expanded viewof the process, followed by a calculating of the contingent obligationfor the period 26 which then feeds back into the reporting & trackingprocess 20.

The network(s) can comprise any of a number of different combinations ofone or more different types of networks, including data and/or voicenetworks. For example, the network(s) can include one or more datanetworks, such as a local area network (LAN), a metropolitan areanetwork (MAN), and/or a wide area network (WAN) (e.g., the Internet),and include one or more voice networks, such as a public-switchedtelephone network (PSTN). Although not shown, the network(s) may includeone or more switches, routers and/or other components for relaying data,information or the like between the computer apparatuses.

Referring now to FIG. 4, a block diagram of a processing for such acomputer apparatus that may be configured to operate as is shown inaccordance with the embodiments. Although shown as separate entities, insome embodiments, one or more processing apparatuses may support aprovider of the reduction in accounting volatility computing apparatus2, a purchaser of the reduction in accounting volatility computingapparatus 4, other computing apparatus 6, an exchange or trading networkcomputing apparatus 8, a reporting company computing apparatus 10, aninvestment manager computing apparatus 12, an administrative computingapparatus 14, and an insurance company computing apparatus 16 allinterconnected by one or more networks. For example, a single processingapparatus may support a logically separate, but co-located lifeinsurance company and investment manager processing apparatus.

The processing apparatus that may be configured to operate for eachentity depicted in FIG. 1 can includes various means for performing oneor more functions in accordance with the embodiments, including thosemore particularly shown and described herein. It should be understood,however, that one or more of the apparatuses may include alternativemeans for performing one or more like functions, without departing fromthe spirit and scope of the teachings herein. More particularly, forexample, as shown in FIG. 3, the apparatus can include a processor 50connected to a memory 52. The memory can comprise volatile and/ornon-volatile memory, and typically stores content, data or the like. Inthis regard, the memory may store software applications 54, instructionsor the like for the processor to perform steps associated with operationof the apparatus in accordance with embodiments herein. The memory mayalso store content transmitted from, and/or received by, the apparatus,such as in one or more databases 56. As described herein, the softwareapplication(s) may each comprise software operated by the respectiveentities. It should be understood, however, that any one or more of thesoftware applications described herein can alternatively be implementedin firmware and/or hardware, without departing from the spirit and scopeherein provided.

In addition to the memory 52, the processor 50 can also be connected toat least one interface or other means for displaying, transmittingand/or receiving data, content or the like. In this regard, theinterface(s) can include at least one communication interface 48 orother means for transmitting and/or receiving data, content or the like.In addition to the communication interface(s), the interface(s) can alsoinclude at least one user interface that can include one or moreearphones and/or speakers, a display 60, and/or a user input interface62. The user input interface, in turn, can comprise any of a number ofdevices allowing the apparatus to receive data from a user, such as amicrophone, a keypad, a touch display, a joystick, or other inputdevice.

According to one aspect of embodiments herein, all or a portion of thesystem, including one or more entities depicted in FIG. 1, generallyoperates under control of one or more computer program products. Acomputer program product for performing the methods of embodiments caninclude a computer-readable storage medium, such as the non-volatilestorage medium, a non-transitory medium, etc. Computer-readable programcode portions, such as a series of computer instructions, can beembodied in such a computer-readable storage medium. A computer readablemedium can thusly storing executable instructions, which when retrievedand executed on a digital computer, causes the digital electricalcomputer to perform the operations corresponding to an embodimentherein.

FIG. 4 can be viewed as a flow chart of one such embodiment, though ofcourse many embodiments are disclosed herein. In a method using anapparatus for implementing an embodiment for the reduction in accountingvolatility of an investment associated with an investment portfolio,wherein the method is implemented on at least one processing apparatus.The processing apparatus(es) may be associated with one or more of theentities depicted in FIG. 1. If more than one processing apparatus isimplementing the embodiment, the processing apparatuses may workinterdependently, independently, or some combination of both.

The embodiment (FIG. 4) can be viewed as a method of using an apparatuswith regard to an agreement governing a contract, the terms including aspecification of at least one measure of a variation in a rate of returncorresponding to a return on an investment portfolio and a contract rateof return on an investment associated with the investment portfoliodetermined by using an amount of the at least one measure of thevariation, wherein the amount of the measure of the variation changesover time. The reduction in accounting variability can achieved as aresult of the ability to account for an investment using a contract rateof return and a contract value (also referred to as a book value) ratherthan using a market rate of return and a market value.

The embodiment, including variations of the embodiment, can expandinvestment choices for purchasers of bank owned life insurance (BOLI)and corporate owned life insurance (COLI) by reducing the accountingvolatility associated with investments associated with investmentportfolios that include equity instruments and, in the case of BOLI,creating investments associated with the portfolios that arebank-eligible investments.

FIG. 4 is a flow chart of such an embodiment. Storing in memory terms ofan agreement governing a contract, the terms including a specificationof at least one measure of a variation in a rate of return correspondingto a return on an investment portfolio and a contract rate of return onan investment associated with the investment portfolio determined byusing an amount of the at least one measure of the variation, whereinthe amount of the measure of the variation changes over time 100.Determining, by a digital computer accessing the memory and receivingmarket data including data corresponding to the at least one measure ofthe variation, the amount of the variation 102. Determining, by thecomputer receiving market data including data on the rate of return onthe investment portfolio and by using the amount of the variation, atleast one of a contract rate of return on the investment associated withthe investment portfolio and a contract value for the investmentassociated with the investment portfolio 104. Outputting, by thecomputer, at least one of the determined contract rate of return and thedetermined contract value 106.

In various variations of the embodiment the at least one measure of thevariation includes, but is not limited to, at least one of: a variance,a covariance, a coefficient of variation, a standard deviation, asemi-variance, a semi-standard deviation, a third central moment(skewness), a fourth central moment (kurtosis), and a volatility index.

In an illustrative variation of the embodiment, the at least one measureof a variation in a rate of return corresponding to an investmentportfolio that is 50% equities and 50% debt is the standard deviation isthe standard deviation of the rate of return on a hypothetical portfoliomade up of 50% the S&P 500 index and 50% the Barclay's U.S. Aggregateindex. In a variation of this illustrative variation, the at least onemeasure a variation in a rate of return corresponding to the investmentportfolio is three measures of variation: 1) the variance in the rate ofreturn on the S&P 500 index; 2) the variance of the rate of return onthe Barclay's U.S. Aggregate index; and, 3) the covariance between thetwo. In yet another variation of this illustrative variation, the atleast one measure of a variation in a rate of return corresponding tothe investment portfolio is three measures of variation is threemeasures of the variation of the rate of return on a hypotheticalportfolio made up of 50% the S&P 500 index and 50% the Barclay's U.S.Aggregate index: 1) the standard deviation; 2) the third central moment(skewness); and, 3) the fourth central moment (kurtosis).

In an other variation of the embodiment, the at least one measure avariation in a rate of return corresponding to the investment portfoliois a volatility index for investment index corresponding to theinvestment portfolio. In an example of this variation, the investmentportfolio is a portfolio of large capitalization stocks and the at leastone measure of a variation in a rate of return corresponding to theinvestment portfolio is the OBOE Volatility Index® (VIX®), which is ameasure of the expected (by the market) volatility of the S&P 500 index.

In still another variation, the investment associated with investmentportfolio includes an ownership interest in the investment portfolio. Inyet an other variation, the investment associated with the investmentportfolio includes a bond issued by an entity that owns the investmentportfolio.

In one variation, the entity that owns the investment portfolio is apartnership. In an other, the entity is a limited liability company. Instill an other, it is an investment fund. In yet an other, theinvestment fund is an investment fund registered with the SEC. In stillan other, the investment fund is an investment fund not registered withthe SEC. In yet an other, the investment fund is a closed-end fund. Instill an other, the investment fund is an open-end fund. In yet another, the investment fund is an exchange-traded fund. In still another, the investment fund is a hedge fund. In yet an other, theinvestment fund is a private equity fund.

In still an other variation, the entity that owns the investmentportfolio is a separate account of an insurance company and theownership interest in the investment portfolio is an ownership interestin a separate account insurance policy.

In yet another variation, the ownership interest in the investmentportfolio is an ownership interest within a retirement plan. In stillanother variation, the retirement plan includes an elective deferralprovision. In yet an other, the retirement plan is adefined-contribution pension plan. In still an other, the retirementplan is a defined-benefit pension plan. In yet an other, the retirementplan is a cash-balance pension plan. In still an other, the retirementplan is an IRA.

In still an other variation, the ownership interest in the investmentportfolio is an ownership interest within a profit sharing plan. In yetanother, the ownership interest in the investment portfolio is anownership interest within a profit sharing plan in which there is anelective deferral provision.

In yet an other variation, the ownership interest in the investmentportfolio is an ownership interest within an employee stock ownershipplan (ESOP). In still an other, the ownership interest in the investmentportfolio is an ownership interest within an employee stock ownershipplan (ESOP) in which there is an elective deferral provision.

In still an other variation of the embodiment, the determining of the atleast one of the contract rate of return on the investment associatedwith the investment portfolio and the contract value of the investmentassociated with the investment portfolio occurs periodically, where thetime period between determinings (referred to as the adjustment period)can be a quarter, a month, a week, a day, or any other specified timeperiod. In yet another variation, the determining of the contract rateof return on the investment occurs at the end of the adjustment period.In still an other, the determining of the contract rate of return on theinvestment occurs at the beginning of the adjustment period.

In yet an other variation of the embodiment, the amount of the at leastone measure of the variation changes over time as a period of time overwhich the amount of the variation is calculated changes. For example,the at least one measure of the variation may be the standard deviationof the rate of return on the S&P 500 index calculated over the 6 monthperiod ending at the end of the last adjustment period.

In still an other variation of the embodiment, the amount of the atleast one measure of the variation changes over time as the measure of atime period over which the measure of the variation is defined changes.For example, the at least one measure of the variation may be thestandard deviation of the average annual rate of return on the S&P 500index defined over a time period whose length equals the period of timebetween the beginning of the first adjustment period and the end of thelast adjustment period. In one variation, the average annual rate ofreturn on the S&P 500 is defined to be equal to the arithmetic mean ofthe annual rate of returns over the total number of adjustment periodsto date. In an other variation, the average annual rate of return on theS&P 500 is defined to be equal to the geometric mean of the annual rateof returns over the total number of adjustment periods to date.

In yet another variation of the embodiment, the amount of the at leastone measure of the variation changes over time both as a period of timeover which the amount of the variation is calculated changes and as themeasure of a time period over which the measure of the variation isdefined changes. For example, the period of time over which the standarddeviation of the rate of return changes as the time period over whichthe standard deviation of the average annual rate of return on the S&P500 index is defined changes.

In an illustrative variation of the embodiment, the contract rate ofreturn on the investment is determined to be equal to the greater of apercentage of the market return on the investment portfolio associatedwith the investment or a specified minimum rate of return where theamount of the percentage and/or the amount of the specified minimum rateof return declines as the amount of the at least one measure ofvariation increases. In a further variation of this illustrativevariation, the amount of the percentage and/or the amount of the minimumrate of return decline as the ratio of the market return to the amountof the at least one measure of variation falls.

In one variation of this illustrative embodiment, the market return isthe market return on the investment portfolio for the latest adjustmentperiod. In an other variation, the market return on the investmentportfolio is the geometric mean of the annual rate of return on themarket portfolio for all of the adjustment periods to date. In still another variation, the market return on the investment portfolio is thearithmetic mean of the annual rate of return on the market portfolio forall of the adjustment periods to date. In yet an other variation, themarket rate of return on the portfolio is a moving average of the annualrate of return on the market portfolio for a specified number ofadjustment periods.

Still another variation of the embodiment further includes storing ameasure of an expected rate of return on the investment portfolio, andwherein the determining includes using the expected rate of return indetermining at least one of the contract rate of return on theinvestment and the contract value for the investment.

In a variation of this variation, the measure of the expected rate ofreturn is the mean (or median or an other measure of the centraltendency) of the rate of return on the investment portfolio. In an othervariation, the measure of the expected rate of return is a weightedaverage of the mean returns on one or market averages (e.g., the S&P 500index, the Barclay's U.S. Aggregate index, etc.). In still an othervariation, the measure of the expected rate of return is estimated usinga time series methodology (e.g., Box-Jenkins, exponential smoothing,etc.). In yet an other variation, the measure of the expected rate ofreturn is estimated using an econometric model. The variations canfurther include the measure of the expected rate of return varying overtime and calculating the expected rate of return.

In another illustrative variation of the embodiment, the contract rateof return on the investment is determined to be equal to be the greaterof the market return on the investment portfolio associated with theinvestment or a specified minimum rate of return b subject to a maximumamount for the contract rate of return equal to a factor a times themeasure of the expected rate of return where a and/or b fall as theamount of the at least one measure of variation increases and/or as themarket rate of return falls relative to the expected measure of returnas measured in units of the amount of the at least one measure ofvariation.

In one variation of this illustrative embodiment, the market return isthe market return on the investment portfolio for the latest adjustmentperiod. In an other variation, the market return on the investmentportfolio is the geometric mean of the annual rate of return on themarket portfolio for all of the adjustment periods to date. In still another variation, the market return on the investment portfolio is thearithmetic mean of the annual rate of return on the market portfolio forall of the adjustment periods to date. In yet an other variation, themarket rate of return on the portfolio is a moving average of the annualrate of return on the market portfolio for a specified number ofadjustment periods.

In an illustrative variation of the embodiment, the contract rate ofreturn on the investment is determined to be equal to the greater of apercentage of the market return on the investment portfolio associatedwith the investment or a specified minimum rate of return where theamount of the percentage and/or the amount of the specified minimum rateof return declines as the amount of the at least one measure ofvariation increases. In a further variation of this illustrativevariation, the amount of the percentage and/or the amount of the minimumrate of return decline as the ratio of the market return to the amountof the at least one measure of variation falls.

In one variation of this illustrative embodiment, the market return isthe market return on the investment portfolio for the latest adjustmentperiod. In an other variation, the market return on the investmentportfolio is the geometric mean of the annual rate of return on themarket portfolio for all of the adjustment periods to date. In still another variation, the market return on the investment portfolio is thearithmetic mean of the annual rate of return on the market portfolio forall of the adjustment periods to date. In yet an other variation, themarket rate of return on the portfolio is a moving average of the annualrate of return on the market portfolio for a specified number ofadjustment periods.

Still another variation of the embodiment further includes storing ameasure of an actual rate of return on the investment portfolio, andwherein the determining includes using the actual rate of return indetermining at least one of the contract rate of return on theinvestment and the contract value for the investment. Yet anothervariation still further includes the measure of the actual rate ofreturn varying over time and the calculating including calculating theamount of the measure of the actual rate of return.

In yet an other variation of the embodiment, the measure of the rate ofreturn (expected and/or actual) is broken down into components, and thedetermining includes using the components in determining at least one ofthe contract rate of return and the contract value for the investment.In a variation of this variation, the components include a constantdollar (a real, net of inflation) return and a rate of inflation. Instill an other variation of the variation, the components include adollar return and a currency return. In yet an other variation of thevariation, the components further include a currency return. In still another variation of the variation, the components further include a riskpremium. In yet another variation of the variation, the risk premiumincludes at least one of a credit risk premium and a liquidity riskpremium. In still another variation of the variation, the at least onemeasure of the variation of the return includes a measure of thevariation of at least one of the components.

In still an other variation of the embodiment, the terms of theagreement governing the contract comprise terms of an agreementgoverning a contract for an investment from a group consisting of avariable life insurance policy, a regulated investment company, apublicly traded partnership, a hedge fund, an investment company, andany combination thereof, the investment corresponding to the investmentportfolio.

In yet an other variation of the embodiment, the contract rate of returnon the investment comprises a contingent obligation of the provider ofthe reduction in accounting volatility.

FIG. 5 is a flow chart illustrating embodiments. First, an investmentportfolio and an investment associated with the investment portfolio arespecified 200. The specification of the portfolio can include the entitythat holds and/or owns the portfolio, the investment policies used tomanage the portfolio and characteristics of the investments thatcomprise the portfolio. For example, the entity that holds the portfoliocan be a limited liability company owned by qualifying investors and theinvestment managers. The investment policies can be to minimize costs byreplicating the performance of specified investment indices and maintaina balance of 50% equities and 50% debt instruments with 40% invested inU.S. securities, 40% in Eurozone securities, and 20% in emerging marketsecurities. Characteristics of the securities can include, in additionto those defined by the investment policies, the split betweengovernment, corporate and asset-backed debt instruments and the averageduration of the debt portfolios.

The specification of the investment associated with the investmentportfolio 200 can include specifying that it is an ownership interest inthe investment portfolio or a bond issued by the entity that owns theinvestment portfolio. For example, the investment can be a bond issuedby the limited liability company that owns the portfolio. The bond canbe a long-term (e.g., 20 years) bond which offers investors in bankowned life insurance (BOLI) and/or corporate owned life insurance (COLI)the ability to earn returns that include both an equity and a foreignsecurity component, thus increasing the diversification of theirinvestment.

In the next step, a measure of the rate of return on the portfolio isspecified and the measure of the return is broken down into components202. The rate of return measure can be the annual rate of return on theportfolio with annual compounding, measured in U.S. dollars. Thecomponents of the rate of return can include the rate of return on U.S.equities, the rate of return on U.S. debt instruments, the rate ofreturn on Eurozone equities, the rate of return on Eurozone debtinstruments, the rate of return on emerging market equities and the rateof return on emerging market debt instruments. The returns on the U.S.securities may be further broken down into the components of theconstant-dollar (real, net of inflation) return and the inflation rate.The returns on the foreign securities may be further broken down into aconstant-currency (real, net of inflation) return, an inflation rate,and a currency return (due to the appreciation, or depreciation, of theforeign currencies relative to the U.S. dollar.

Then a measure of an expected return on the portfolio is specifiedtogether with a method for determining an amount of the expected returnusing the components of the return and for updating the amount of theexpected return as new data becomes available 204. For example, themeasure of the expected return can be the expected geometric mean annual(with annual compounding) rate of return on the portfolio in U.S.dollars over the life of the bond (20 years). The method for determiningan amount of the expected return using the components can be to use acombination of historical performance data and publicly availableforecasts. For example, an expected rate of return on the U.S. equitiescomponent of the portfolio's return can be estimated using a combinationof the historical geometric mean real (constant-dollar) return on theS&P 500 as compiled by Ibbotson and Associates and publicly availableinflation forecasts. Adding the long-term geometric mean rate of returnon the S&P 500, adjusted for the current stabilized marketprice/earnings ration (the ratio of stock prices to a 10 year movingaverage of earnings) and the mean expected inflation rate can determinean expected return for this component of the portfolio.

The method further includes a method for updating the amount of theexpected return (and its components as data becomes available 204. Forexample, the expected return for the U.S. equity component of theportfolio's expected return can be updated as new data on earnings,earnings growth rates, and inflation forecasts is received. Expectedcurrency returns can be updated as new data on relative inflation rates,economic growth rates and trade balances is received.

At least one measure of a rate of return corresponding to the return onthe portfolio and at least one measure of a variation in the rate ofreturn corresponding to the return on the portfolio are specified usingthe components of the return on the investment portfolio 206. For theU.S. debt securities component of the portfolio, the rate of return onthe Barclay's U.S. Aggregate index can be the specified measurecorresponding to the return on that component of the portfolio and forthe U.S. equities, the return on the S&P 500 index can be the specifiedmeasure corresponding to the return on the U.S. equities component ofthe portfolio. The returns on other market indexes can be specified asthe measures corresponding to the returns on other components of theportfolio.

At least one measure of a variation in the rate of return correspondingto the return on the portfolio is specified using the components of theportfolio 206. For debt instrument components of the portfolio, aspecified volatility measure can be the average duration of the debtportfolio component. For components with a corresponding market indexand for which market index a volatility index is available (e.g., theVIX®) volatility for the S&P 500 index, corresponding to the U.S.equities component of the portfolio). For each of the components, aspecified volatility measure can be the variance-covariance matrix ofthe returns on all of the corresponding market indexes.

A method is specified for determining the at least one measure of avariation in the rate of return corresponding to the rate of return,including a method for updating the amount of the measure as new databecomes available 208. For example, duration as a measure of thevolatility of debt instrument components of the portfolio can bedetermined by calculating the actual average duration of the debtsecurities held in the portfolio and the duration amount can be updatedevery adjustment period by recalculating the current actual averageduration of the debt securities held in the portfolio. A volatilityindex measure of volatility can be determined by accessing the mostrecently published number for the index and updated every adjustmentperiod by accessing the most recently published number. Avariance-covariance matrix for the corresponding market indexes can bedetermined by obtaining latest available return data for the specifiedreturn measure (e.g., returns per day, week, month, quarter, etc.) forthe specified calculation period (e.g., a month, quarter, year, 5 years,etc.) for all of the corresponding indexes and performing the requisitecalculations. The matrix can be updated every adjustment period byrecalculating the matrix using the latest available return data.

A method is specified for determining, using the amount of the expectedreturn and the amount of the at least one measure of variation, acontract rate of return, a contract value and an amount of a contingentobligation 210. The amount of the contract rate of return can equal aweighted (by capitalization) average of the contract returns on eachcomponent of the portfolio. The contract rate of return on a componentcan equal the greater of: 1) a factor a times the amount (for theadjustment period) of the actual return on that component of theportfolio for the adjustment period; and, 2) a minimum rate of return b;where both a and b fall as the amount of the measure of volatility forthe component increases and both a and b are further adjusted inresponse to the difference to date between the geometric mean of theactual returns on the component to date and the determined (thisadjustment period) amount of the expected return for the component.

The term of the agreement (including 200-210) and initial data,including the amount of the expected return on the investment portfolioand an initial amount of the at least one measure of variation 212.

FIG. 6 illustrates the implementation, using the computer, of theagreement whose terms were entered in 212. Every adjustment period, datais received on the return on the investment portfolio, including thereturn broken down into components, and the actual return to date isdetermined, including the return broken down into components 300. Datacorresponding to the expected rate of return, including the components,is received and an updated expected rate of return is determined usingthe components 302. Data is received corresponding to at least onemeasure of variation and an updated amount is determined 304. Thecontract rate of return, contract value and the contingent obligation isdetermined 306. The contract rate of return, contract value andcontingent obligation are outputted 308.

FIG. 7 illustrates an embodiment which may reduce the risk of “fallingoff the cliff” (i.e., the risk that the contract value will deviate fromthe market value of an investment associated with an investmentportfolio by an amount that triggers a write-down of the investment orother remedy specified in the contract) by incorporating a variablespeed of adjustment factor into the terms of the contract and using anamount of a measure of variation in a rate of return corresponding tothe investment portfolio to calculate the amount of the adjustment speedfactor wherein the amount of the measure of variation changes over time.

An increase in the speed of adjustment factor in response to an increasein the measure of the amount of variation in the rate of return mayreduce the deviation of the contract value from the market value, thusreducing the risk of “falling off the cliff.” The increase in the speedof adjustment factor caused by the increase in the measure of variationmay be further augmented by a factor or factors reflecting the increasein risk as the amount of the ratio of the contract value divided by themarket value (CV/MV) approaches a contractually specified “breach ratio”(BR), where BR is stored in memory and used in calculating the amount ofthe adjustment speed factor.

The at least one measure of the variation in the rate of returncorresponding to the return on an investment portfolio may take anydesired form. One possible measure is a standard deviation in the rateof return relative to a moving average of the rate of return over aspecified period (e.g., 12 months, 18 months, etc.). An other possiblemeasure is a semi-variance of the rate of return relative to a movingaverage of the rate of return over a specified period (e.g., 12 months,18 months, etc.). Still other possible measures of the variability ofthe return include a volatility index or indices and impliedvolatilities calculated from option values using a formula or formulasfor option valuation.

An other possible measure of the variation in the rate of return is thevariation of the rate of return relative to an expected rate of returnon the portfolio (EY) over the most recent period of X months, where Xequals 12, 18 or any other number of months, and the variation iscalculated as a standard deviation, variance, semi-variance, etc.

The measure of an expected rate of return on the portfolio, EY,specified in a contract may be any form of desired measure and stored inmemory. An amount of the expected return may be computed and the amountof the expected return may be used in determining the at least one ofthe contract rate of return and contract value.

For investment portfolios of debt securities, the measure of EY may be acurrent or lagged yield to worst (Y) of the investment portfolio, amoving average of Y, a built-up moving average of Y, etc. If a movingaverage or built-up moving average of Y is used to compute an amount forEY, the length of the moving average may be chosen to be approximatelyequal to the average duration of the securities in the investmentportfolio. Other methods of computing an amount for EY may include usinga moving average of the rate of return on the investment portfolio,long-term average returns on the types of securities in the investmentportfolio, and econometric methods using a variety of economic andfinancial variables.

The calculation of an amount for the adjustment speed factor may beasymmetric with regard to the relationship of the contract value, CV, tothe market value, MV, of the investment associated with the investmentportfolio. For example, if MV is less than CV, the adjustment speedfactor may increase as the amount of the at least one measure ofvariation in the rate of return increases but if MV is greater than CV,the adjustment speed factor may remain fixed at a constant amountregardless of the amount of the at least one measure of variation in therate of return.

The calculating of an amount for the adjustment speed factor may becarried out as one part of the calculating of a contract rate of return(CR) according to formula for calculating CR that is one of the terms ofthe contract stored in memory. An example of a formula for calculatingCR where an amount for the adjustment speed factor, A, is calculatedusing an amount of a measure of a variation in a rate of return is:CR=((MV+EA)/CV)^(A)*(1+EY)*(1−EF)−1 andA=x*V/d for (MV+EA)/CV<1;A=1/d for (MV+EA)/CV>1Where:CR is the contract rate of return (may also be referred to as thecrediting rate).MV is the market value.EA is the Enhancement Amount.CV is the contract value.V is the amount of the variation in the rate of return relative to EY.A is the Adjustment speed factor.EY is a built-up moving average of Y, the Yield to Worst of theinvestment portfolio.EF is the amortization factor for fully amortizing EA and wherein EA isamortized relative to MV.x and d are specified constants.

An amount for the adjustment speed factor, A, may be calculated usingother factors in addition to V, the amount of the variability. Anexample of a formula for calculating A as a function of both V and theamount of the MV/CV ratio relative to the breach ratio, BR (the ratio ofMV/CV that triggers an event such as a write-down) is:A=xV/(a+b*((MV+EA)/CV−BR)/(1−BR)) for (MV+EA)/CV>BR and ≦1A=xV/a for (MV+EA)/CV≦BRA=1/(a+b) for (MV+EA)/CV>1Where:a and b are specified constants.BR is the Breach Ratio (the ratio of MV/CV that triggers a write-down ofinvestment value).

FIG. 7 is a flow chart of an embodiment, storing in memory terms of acontract, the terms including a specification of at least one measure ofa variation in a rate of return corresponding to a return on aninvestment portfolio, a variable speed of adjustment factor and acontract rate of return on an investment associated with the investmentportfolio computed by using an amount of the at least one measure of thevariation to calculate an amount of the adjustment speed factor, whereinthe amount of the measure of the variation changes over time 402.Computing, by a digital computer accessing the memory and receivingmarket data corresponding to the at least one measure of the variation,the amount of the variation 404. Calculating, by a digital computeraccessing the memory and receiving market data, the amount of theadjustment speed factor 406. Determining, by the computer receivingmarket data on the rate of return on the investment portfolio and byusing the amount of the adjustment speed factor, at least one of acontract rate of return on the investment associated with the investmentportfolio and a contract value for the investment associated with theinvestment portfolio 408. And outputting, by the computer, at least oneof the determined contract rate of return and the determined contractvalue 410.

In sum, appreciation is requested for the robust range of possibilitiesflowing from the core teaching herein. More broadly, however, the termsand expressions which have been employed herein are used as terms ofteaching and not of limitation, and there is no intention, in the use ofsuch terms and expressions, of excluding equivalents of the featuresshown and described, or portions thereof, it being recognized thatvarious modifications are possible within the scope of the embodimentscontemplated and suggested herein. Further, various embodiments are asdescribed and suggested herein. Although the disclosure herein has beendescribed with reference to specific embodiments, the disclosures areintended to be illustrative and are not intended to be limiting. Variousmodifications and applications may occur to those skilled in the artwithout departing from the true spirit and scope defined in the appendedclaims.

Thus, although only a few exemplary embodiments have been described indetail above, it is respectfully requested that appreciation be givenfor the modifications that can be made based on the exemplaryembodiments, implementations, and variations, without materiallydeparting from the novel teachings and advantages herein. Accordingly,such modifications are intended to be included within the scope definedby claims. In the claims, and otherwise herein, means-plus-functionlanguage is intended to cover the structures described herein asperforming the recited function and not only structural equivalents, butalso equivalent structures. Thus, although a nail and a screw may not bestructural equivalents in that a nail employs a cylindrical surface tosecure wooden parts together, whereas a screw employs a helical surface,in the environment fastening wooden parts, a nail and a screw may beequivalent structures.

Although specific terms are employed herein, they are used in a genericand descriptive sense only and not for purposes of limitation.

1. A method of using an apparatus to reduce accounting volatility andrisk, the method including: storing in memory terms of a contract, theterms including a specification of at least one measure of a variationin a rate of return corresponding to a return on an investmentportfolio, a contract rate of return on an investment associated withthe investment portfolio, and a variable speed of adjustment factor usedin determining the contract rate of return wherein the variable speed ofadjustment factor is computed by using an amount of the at least onemeasure of the variation and the amount of the at least one measure ofthe variation changes over time; computing, by a digital computeraccessing the memory and receiving market data corresponding to the atleast one measure of the variation, the amount of the variation;calculating, by a digital computer accessing the memory, using theamount of the variation, and receiving market data, the amount of theadjustment speed factor; determining, by the computer receiving marketdata on the rate of return on the investment portfolio and by using theamount of the adjustment speed factor, at least one of a contract rateof return on the investment associated with the investment portfolio anda contract value for the investment associated with the investmentportfolio; and outputting, by the computer, at least one of thedetermined contract rate of return and the determined contract value. 2.The method of claim 1, wherein the at least one measure of the variationincludes at least one of: a variance, a covariance, a coefficient ofvariation, a standard deviation, a semi-variance, a semi-standarddeviation, a third central moment, a fourth central moment, a duration,a volatility index and an implied volatility.
 3. The method of claim 1,further including storing a measure of an expected rate of return on theinvestment portfolio, and wherein the computing includes computing anamount of the expected return and the determining includes using theamount of the expected rate of return in the determining said at leastone of the contract rate of return on the investment and the contractvalue for the investment.
 4. The method of claim 3, wherein the at leastone measure of the variation in the rate of return is a measure of thevariation of the rate of return relative to the expected rate of returnon the investment portfolio.
 5. The method of claim 3, wherein themeasure of the expected rate of return is a yield to worst of theinvestment portfolio.
 6. The method of claim 3, wherein the measure ofthe expected rate of return is a moving average of the yield to worst ofthe investment portfolio.
 7. The method of claim 3, wherein the measureof the expected rate of return is a built-up moving average of the yieldto worst of the investment portfolio.
 8. The method of claim 3, whereinthe measure of the expected rate of return is a moving average of therate of return on the investment portfolio.
 9. The method of claim 3,wherein the amount of the measure of the expected return is determinedusing the long-term average returns of the types of securities in theinvestment portfolio.
 10. The method of claim 3, wherein the amount ofthe measure of the expected rate of return is determined econometricallyusing economic and financial data.
 11. The method of claim 1, furtherincluding storing a breach ratio, and wherein the calculating includesusing the breach ratio in calculating the amount of the adjustment speedfactor.
 12. An apparatus adapted to reduce accounting volatility andrisk, the apparatus including: memory storing terms of a contract, theterms including a specification of at least one measure of a variationin a rate of return corresponding to a return on an investmentportfolio, a contract rate of return on an investment portfolioassociated with the investment portfolio, and a variable speed ofadjustment factor used in determining the contract rate of returnwherein the variable speed of adjustment factor is computed by using anamount of the at least one measure of the variation and the amount ofthe measure of the variation changes over time; a computer programmed tocarry out the steps of: computing, by accessing the memory and receivingmarket data corresponding to the at least one measure of the variation,the amount of the variation; calculating, by accessing the memory, usingthe amount of the variation, and receiving market data, the amount ofthe adjustment speed factor; determining, by receiving market data onthe rate of return on the investment portfolio and by using the amountof the adjustment speed factor, at least one of a contract rate ofreturn on the investment associated with the investment portfolio and acontract value for the investment associated with the investmentportfolio; and outputting, at least one of the determined contract rateof return and the determined contract value at an output device.
 13. Theapparatus of claim 12, wherein the at least one measure of the variationincludes at least one of: a variance, a covariance, a coefficient ofvariation, a standard deviation, a semi-variance, a semi-standarddeviation, a third central moment, a fourth central moment, a duration,a volatility index and an implied volatility.
 14. The apparatus of claim12, further including storing a measure of an expected rate of return onthe investment portfolio, and wherein computing includes computing anamount of the measure of the expected return and the determiningincludes using the amount of the expected rate of return in thedetermining said at least one of the contract rate of return on theinvestment and the contract value for the investment.
 15. The apparatusof claim 14, wherein the at least one measure of the variation in therate of return is a measure of the variation of the rate of returnrelative to the expected rate of return on the investment portfolio. 16.The apparatus of claim 14, wherein the measure of the expected rate ofreturn is a yield to worst of the investment portfolio.
 17. Theapparatus of claim 14, wherein the measure of the expected rate ofreturn is a moving average of the yield to worst of the investmentportfolio.
 18. The apparatus of claim 14, wherein the measure of theexpected rate of return is a built-up moving average of the yield toworst of the investment portfolio.
 19. The apparatus of claim 14,wherein the measure of the expected rate of return is a moving averageof the rate of return on the investment portfolio.
 20. The apparatus ofclaim 14, wherein the amount of the measure of the expected return isdetermined using the long-term average returns of the types ofsecurities in the investment portfolio.
 21. The apparatus of claim 14,wherein the amount of the measure of the expected rate of return isdetermined econometrically using economic and financial data.
 22. Theapparatus of claim 12, further including storing a breach ratio, andwherein the calculating includes using the breach ratio in calculatingthe amount of the adjustment speed factor.
 23. A non-transitory tangiblecomputer readable medium having code stored thereon, which whenretrieved and executed on a computer performs the operations comprising:storing in memory terms of a contract, the terms including aspecification of at least one measure of a variation in a rate of returncorresponding to a return on an investment portfolio, a contract rate ofreturn on an investment associated with the investment portfolio, and avariable speed of adjustment factor used in determining the contractrate of return, wherein the variable speed of adjustment factor iscomputed by using an amount of the at least one measure of the variationand the amount of the measure of the variation changes over time;computing, by a digital computer accessing the memory and receivingmarket data corresponding to the at least one measure of the variation,the amount of the variation; calculating, by a digital computeraccessing the memory, using the amount of variation, and receivingmarket data, the amount of the adjustment speed factor; determining, bythe computer receiving market data on the rate of return on theinvestment portfolio and by using the amount of the adjustment speedfactor, at least one of a contract rate of return on the investmentassociated with the investment portfolio and a contract value for theinvestment associated with the investment portfolio; and outputting, bythe computer, at least one of the determined contract rate of return andthe determined contract value.